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I am a bookkeeper and small business consultant, AMA
My background: I've run a small bookkeeping business in California for the past 6 years, and worked as a bookkeeper for another 6 years before that. Over the years I've been deep in the books of dozens of businesses, both successful and not. In the process of working closely with the owners of said businesses, I've learned a lot about what makes a small business work and what means I shouldn't get too attached. I'm a generalist, working with for and non-profit businesses as well as well to do individuals (who often have financial lives more complex than my business clients.)
I'm bored and it's a smoky Sunday trapping me indoors, so if you have a question about bookkeeping or running/starting a small business, fire away.
I'm from Brazil, so I don't really understand taxes from the US. I'm also young, so I don't understand taxes from my own country, heh. That said, do you take a lot of time in your job to take care of one single business? Accounting in Brazil is very bureaucratic, and it can often take hundreds of hours just to keep up with the taxes. From what I know, hiring someone to provide accounting is also mandatory. Is this the same in the US?
For a single small business (1-5 employees, a single location, 2 or 3 financial accounts) it can take 2 or 3 hours a month, which is my business niche. No one needs an on-site staff person for so few hours, so small businesses often hire an independent bookkeeper to help them. Once they grow large enough to need an office manager to handle the general operations, they will sometimes have the office manager do the bookkeeping, if they have the skillset.
In the US, there are accountants, who are licensed and certified by the state, and they are generally the people you go to to file taxes or get advice on more complex tax questions. There are also bookkeepers, who do the day to day work of recording transactions, paying bills, following up with outstanding invoices and other day to day tasks. For a very small business you can absolutely do all of your own bookkeeping and tax filing, but it's not really advisable. Accounting and bookkeeping take skill and training, and there are plenty of ways to make sure you get a call from the tax man if you don't do it right.
Alright, I want you to sell me on a bookkeeping service. Background: I have a single person software dev/consulting business, multiple rotating clients, occasional subcontractors, considering possibly hiring a full time employee before the end of the year, but still undecided. So in a state of growth, but trying to be carefully managed growth. Month to month my bookkeeping tasks are very minor, and so far tracking everything in spreadsheets has not caused me any issues, though I am fully anticipating the day that it is does start causing issues. The only real pain point I have is preparing everything at tax time to hand off to my CPA. It's mostly just tedious, as I always have all the information needed, but am not always on top of centrally collecting all the pieces that I will need throughout the rest of the year. Given that admittedly limited information, what would be your recommendation to me?
From what you've told me, your business model is very, very simple. One or two revenue streams, a checking account, limited fixed assets aside from some computing hardware and office furniture. Even as you grow your bookkeeping will probably stay very simple, but there are some gains you could have right now from using a bookkeeper and bookkeeping software.
First is the tax issue, which you already mentioned. If a professional was keeping track of your books, at the end of the year it would be as easy as asking your bookkeeper to pull a Profit & Loss and a Balance Sheet and sending them to the accountant.
Second is the value of your time. I don't know what your rate is for your clients, but it's certainly more than you'd pay a bookkeeper to keep track of the finances. You'd want to have a recurring meeting of some sort throughout the year so that you can do Q&A with the bookkeeper, clear up any mysteries, all that, but it would certainly take less of your time than managing it yourself.
Third is more about bookkeeping software than a bookkeeper personally, but if you're making invoices in a spreadsheet you're wasting a good bit of time. Bookkeeping software will make sure that the time and expenses you bill for are properly added up and assigned to the correct client, can connect the reimbursable expenses to the invoice, and a bunch of other time-saving things. Additionally, once you add an employee, having centralized time tracking that can integrate with your invoicing makes a huge difference.
There's a whole lot more I could go into here, but I think that's a decent overview. TL;DR: Your time is valuable and a proper bookkeeper with proper software can do it a lot better/faster.
What are some typical mistakes that most small businesses make? Which are the characteristics of businesses that tend to be successful?
The most common mistake I see small businesses make is failing to delegate. This is especially common in startups where it's earned the name "Founder's Syndrome", but essentially the person who started the business feels like they need to keep managing everything themselves, because that's how it started, and they know how it should be done best.
The problem is that at some point there is just too much to do. No matter how obsessed the owner is with the business, they don't have endless time to devote to it. Being able to hire the right people and trust that they can handle their work is a big and difficult step for a founder to do, and a lot of businesses never surpass that stumbling block because the founder can't delegate or keep all the balls in the air themselves.
The other side of the coin is failing to manage costs. It's often dealing with boring numbers (which is why I or someone like me handles it), but at every step you need to keep an eye on your bottom line. Will hiring this new person bring in more revenue than they cost? Will they free up time so that someone else can bring in more money? Will expanding to that new location actually bring in enough revenue once it's rolling? Do we have the cash reserves to handle the buildout and the first 3-6 months while it's getting up to speed?
The businesses that are successful are the ones where the owner doesn't just know the industry, they also understand how to operate a business or willing to hire someone who does. You can be a great plumber, graphic designer or chef, but if you don't understand how the business works you'll run a business only at your personal capacity or you'll go back to working for someone else soon enough.
This hits home pretty hard. My boss has never been able to delegate without micromanagement in his life. Our business should have been a huge success by now, but he’s managed to mess it up. We’ve been helped to fail by shitty business deals, really stupid business decisions by the owner, as well as a “CFO to go!” who was in over his head and failed to let us know.
In your experience are there signs to look for that someone may not be enough? Or that simple bookkeeping/ accounting isn’t quite keeping up?
Are there industries/ situations that you would recommend a bookkeeper over diy more than others?
Signs that the owner of a business might not be up to the task: blaming others for their mistakes, ignoring evidence of the negative impact their choices are having on the business, ignoring the advice of people they hire to give advice, micromanagement.
As far as whether the bookkeeping and accounting isn't keeping up: is your bookkeeper or accountant responsive to requests in a timely fashion? Can you get reports on the state of the books that are accurate up to the end of the previous month (at least, once you're a week into the month)? Does your accountant want to interact with you and help you have the best tax situation possible, or do they just take the P&L/Balance Sheet and turn it into a tax return without comment or further assistance?
Much like with other skills, within both bookkeepers and accountants there's a wide range of skill levels and competencies at price points to match. There are some that are little more than assistants to the bookkeeping or tax software, and provide little human knowledge or perspective. On the other end of the spectrum there are people who are interested and passionate about business and bookkeeping, and want to work with you to make your business the best it can be.
The situation where someone could be diy with their bookkeeping and do the least damage is a sole proprietor of a service. They don't have corporate reporting or tax requirements, they don't deal with inventory, shipping or sales/use taxes and the related licenses. Especially if you just do one thing on a flat rate basis for a small number of ongoing clients and don't ever have reimbursable expenses you can avoid needing to do much in the way of invoicing.
The thing is that those people are often my best clients because their hourly rate is high enough it's not worth it to do their own books. See the comment I made to @americanaquarium above; they're in the sort of business where it's most viable to diy, and I laid out why I believe it's not in their best interest.
How does one get into bookkeeping, and are specific degrees or certifications required? How do you ensure information security for the customer's data that you access?
People get into bookkeeping either by taking classes at a community college or apprenticing with another bookkeeper. You don't need a degree or certification, though there are some available that the layperson doesn't really know or care about.
In regards to security: I use Google Drive with two-step verification to store the client's files, and encourage my clients to use a password manager with a password sharing functionality. Ideally the client can store and manage their passwords in such a way that I can have access to the accounts I need to manage the books while never knowing their passwords. I like LastPass, but there's a number of good solutions out there depending on your needs. Some financial institutions have the ability to set up view-only access accounts so that I can get the data I need without having the ability to change anything. When possible I prefer this, as it insulates me from any accusations of impropriety, but it's not a common option as of yet.
Did the standard deduction go up for next year? If so how much will that affect small businesses?
The personal standard deduction did go up a lot, and it won't affect small businesses at all, as business expense deductions are handled separately. What will affect small businesses is a decreased tax rate on income above $50k/yr.
got ya, i used to be a sole proprietor.